Record Private Equity Pay Adds New Fuel to Old Tax Debate

A tax reform bill proposed by Rep. Dave Camp (R, Mich.) includes a proposal to change the way carried interest is taxed.

Bloomberg

Private equity executives’ record take home pay last year may reignite the debate over the way their share of investment profits is taxed.

“At the moment, they are benefitting from a very significant subsidy from the U.S. Treasury because the bulk of the value of their labor created isn’t taxed as ordinary income,” said Robert Jackson Jr., an associate professor of law at Columbia Law School.

Carried interest is private equity’s cut in investment returns, usually amounting to 20% or more of profits. Historically those investment profits have been taxed at a lower rate as capital gains rather than as income.

Tax lawyers and others outside the industry have said that it is part and parcel of executives’ compensation and should be taxed as ordinary income. But the industry has argued that they are sharing the risks of investors, so carried interest should be taxed as capital gains.

To put private equity executives’ take home pay into perspective: The nine founders of four of the world’s largest private equity firms reported a combined $2.6 billion in total compensation last year.

Both Republican and Democratic lawmakers have taken notice.

In its proposed budget for 2015, the Obama Administration predicted that altering the tax treatment of carried interest would bring in a total of $13.8 billion in revenue over a 10-year period from 2015 to 2024, including $2.15 billion in 2015 alone.

Meanwhile, in February, Rep. Dave Camp (R, Mich.) renewed discussions by introducing a broader tax reform bill that included a proposal to change the carried interest tax treatment. Congress’ Joint Committee on Taxation estimates that proposed carried interest tax changes would bring in $3.1 billion of additional revenue this year through 2023.